Domestic Issue Management

Dr. Himanshu Joshi

Investment Banking - Indian Institute of Management, Rohtak
The IPO Decision
• Investors in a Private Unlisted Company
- Promoter (Control) Time Bound Period

- Strategic Investor (Business Opportunity)

- Financial Investor (Return on Investment)
• Private Window (Off Market Window) does not offer the facility of
anytime entry of exit into the company’s equity capital.
• Private Window also does not provide any price validation for the
company’s unlisted stocks, which has to be derived from time to time
through various valuation methodologies.
The IPO Decision
• The IPO (On Market Window) – Provide anytime entry and exit facility
to investors from the company’s equity capital.
• Price Discovery.
The IPO Decision
• Strategic dimension
• Corporate philosophy (May prefer to remain Private)
• Unlock Value
• Better visibility, credibility, attracts and retains better
talent if listed.
• Large family of small shareholders
• Requires higher maturity levels for the company
• Makes it more expensive for promoters to consolidate
stakes.
• Post-issue promoter holding is a concern for possible
hostile bids.
• Privacy, less regulation if unlisted
• Disclosures, corporate governance, higher compliance
and shareholder activism if listed.
The IPO Decision
• Financial dimension
• IPO decision is often more financial than strategic. An
imperative in capital intensive industries. (ImmuLogic)
• IPO provides liquidity in shares and more fund raising
opportunities for growth financing.
• Liquidity event for existing investors and ESOP holders
• Provides currency for M&A
• Requires preparation of the proper balance sheet.
• Requires a credible investment plan.
• Post-listing performance pressures.
• Public vs. Strategic sale (strategic sale provides better
valuation)
The IPO Decision
• Investment Banking dimension
• Business Plan, future outlook, past financial
performance, grading potential
• Proposed Issue pricing, size of the offer
• Post-Issue Capital Structure
• Prevailing market conditions, timing the offer.
• Issue Structure, free float
• Possibility of finding institutional support.
• Smaller issues backed by non-reputed merchant bankers
lack credibility and have been pulled up by SEBI.
Public Offer Structures
• Initial Public offer can be made under the
following structures -
• New issue of Shares by the Issuer – This has the effect
of increasing the issued capital of the company.
Resolution under section 81(1A) of the Companies Act
would be required.
• Offer for Sale – Under this structure, the existing
shareholders make an offer to the public of existing
shares. No impact on company’s balance sheet. Shares
should have been held for at least one year.
• Combined Public Offer – A combination of a public
issue and an offer for sale.
OFFER STRUCTURE CASES
• TATA CONSULTANCY LTD – Mix of Public issue
and Offer for Sale
• BIOCON – Mix of Public issue and Offer for Sale
• MCX – Pure Offer for Sale
• JUST DIAL – Pure Offer for Sale
Fixed Price Offers..
• Its 100% retail offer.
• All investors are issued shares at the price stipulated by the company and
announced beforehand through its offer document.
• The price is arrived at by the Issuer company based on its fundamentals
and market factors in consultations with its investment banker.
• No scope of ambiguity in issue pricing.
• Wide dispersal of shareholding among the retail investors that would add
depth to the trading after listing.
• Does not allow any say for the investors in price determination.
• Fixed price can some time lead to underselling or overselling the company,
if the demand for its share is misread by the merchant banker.
• Higher floatation costs.
Book-Built Offers
• The book-built issue follows a bidding process wherein bids are received
from investors based on the floor price or the price band.
• After all the bids are evaluated, the final price known as the cut-off price is
arrived and it becomes the price at which all investors uniformly are
allotted shares in the company.
• This aspect of book building provides a limited amount of price discovery
for the issue.
• As far a offer document is concerned, the draft prospectus to be filed with
SEBI would be a Draft Red Herring Prospectus that does not specify the
issue price and therefore, the total amount of the issue.
• A Red Herring Prospectus is a prospectus that does not have particulars on
the price of the securities offered or the quantum of securities offered.
Regulatory Framework for Public Offers

• Public Offers are regulated under the SEBI (Issue of

Capital and Disclosure Requirements) Regulations 2009
(formerly DIP Guidelines 2000 upto 25th August 2009) as
amended from time to time, in short, the ICDR
Regulations.
• Other aspects of issues such as issue of shares to the
public, allotments and incidental matters are governed
by sections 56-58, 60-76 of the Companies Act 1956 –
(corresponding to Chapter III of the Companies Act
2013).
• Issues are also governed by Listing Guidelines and the
SCRA 1956, SCR Rules 1957 for the purpose of listing
and secondary market trading thereafter.
• The issue of shares to non-residents is governed by the
Foreign Exchange Management Act 1999.
KEY PROVISIONS OF THE COMPANIES ACT 2013 ON PUBLIC
OFFERS

• Public companies may make public offers, rights offers,

bonus issues and private placements. Private companies
can make only rights offers, bonus issues and private
placements. – sec 23
• Any document used for issue of shares meant for the
public will be deemed a prospectus – sec 25
• Sec 27 (corresponding to previous sec 61) has new
provision on change of objects stated in a prospectus only
by special resolution. Dissenting shareholders to be given
mandatory exit option by promoters or controlling
shareholders at exit price to be specified by SEBI.
• No company can list as a SPAC to acquire shares in listed
companies – Proviso to section 27(1)
KEY PROVISIONS OF THE COMPANIES ACT 2013 ON PUBLIC
OFFERS
• Sec 28 - New provision providing statutory framework for an
offer for sale by selling shareholders in consultation with the
board.
• Offer for sale expenses to be borne entirely by selling
shareholders – sec 28(3).
• Public offers to be in demat form only – section 29
• Section 33 once again provides for the requirement of
application form (along with abridged prospectus) while SEBI is
moving more towards on-line public offers.
• Any company (private or public / listed or unlisted) may make
GDR issue with special resolution – sec 41
• Sec 40 provides for mandatory approval from stock exchange
prior to opening the public offer while SEBI regulations provide
for in-principle approval. The section does not specify remedies
in case of decline of approval by stock exchange.
• Special resolution.
Important Concepts – ICDR Regulations

• Lead Manager – BRLMs, issue management team

• Underwriting syndicate
• Issue Management Team
• Fixed Price Offer
• Book Built Offer – Floor, Cap, Price Band and Cut-off
Price
• Issue Size and NPO (Issue size less Promoters’ component
less reservations).
• Reservations on Competitive Basis – employees (not more
than 5% of issue size, shareholders of group companies
(10%), customers and creditors (bondholders or depositors)
5%. Inter-se adjustments among categories is permitted.
• Anchor Investor – QIB with a minimum application size of
Rs. 100 million. (30% of the QIB allocation should be made
to anchor investors). Anchor investor concept replaced ‘firm
allotment’ concept with lock-in of 30 days.
Important Concepts – ICDR Regulations

• Qualified Institutional Bidders (QIBs), Retail Investors and

HNIs
• Eligibility to go public
• IPO Grading
• Lock-in of pre-issue capital
• Promoters’ Contribution
• Issue Allocation
• Minimum Lot (for anchor investors Rs. 5 crore, min 2 investors
for issues upto Rs. 250 crore, min five investors beyond Rs. 250
crore). For others minimum application size between Rs 5000
and Rs. 7000.
• Offer Document – DRHP – RHP - Prospectus
• Green-shoe Option
• Basis of Allotment
• Listing Agreement
 Important Concepts – ICDR Regulations

• Eligibility Criteria – Normal Eligibility conditions failing which

alternative conditions.
• Company should satisfy in 3 out of the preceding 5 financial years,
the following minimum criteria –
• Minimum networth of Rs. 1 crore
• Consolidated Profit of atleast Rs. 15 crore
• Tangible asset base of atleast Rs. 3 crore
• The issue size shall not exceed 5 times the pre-issue networth.
• Alternative Conditions –
• Issue to be made through mandatory book building route.
• Atleast 75% of NPO allotment to QIBs failing which issue will be
cancelled.
 Important Concepts – ICDR Regulations

• Issue Pricing – IPO pricing is different from valuation of a company. It

is more about ‘setting the offer price’. Fundamental approach does not
figure much, instead relative valuation based on P/E and BV multiples
is used.
• Differential Pricing – to employees (not more than Rs. 1 lakh) and
retail investors. Max discount 10%. Anchor investors and promoters
can subscribe at higher prices.
• Price disclosure can be made 2 days before the IPO opens in the RHP.
• No outstanding convertibles shall exist at the time of IPO other than
ESOPs.
• NPO – NPO shall be 25% or 10% of post-issue capital as the case may
be depending upon the size of the issue being more than or less than
Rs. 4000 crore. Minimum NPO requirement does not apply to PSUs
and infra companies whose projects are appraised and funded by
banks or FIs.
Main Provisions for IPOs - ICDR Regulations read with
SCR Rules / Companies Act

• Face Value – Rs. 10 if issue price is upto Rs. 500, less than
Rs. 10 for higher prices.
• Promoters’ Contribution – shall not be less than 20% of
post-issue capital (on fully diluted basis). In a convertible
structure PC should be equivalent to 20% as above either
as equity or through the issue.
• Shares acquired for non-cash consideration in the
preceding three years and at less than offer price in the
preceding one year shall be ineligible for reckoning 20%.
• The promoters shall satisfy the requirements at least one
day prior to the date of opening of the issue and the
amount shall be kept in escrow account.
Main Provisions for IPOs - ICDR Regulations read with
SCR Rules / Companies Act
• Lock-in – The minimum promoters’ contribution of 20% shall be
locked in for 3 years from the date of allotment of shares or from
the date of commencement of operations by the company,
whichever is later.
• Excess contribution by the promoters in an issue over and above
what is required to make up the 20% shall be locked in for one
year.
• The entire pre-issue capital in case of an IPO shall be locked in for
one year except the promoters’ contribution since it is locked-in
separately except –
• shares allotted to employees prior to the IPO under a scheme
• shares held by venture capital fund or a foreign venture capital
investor for a period of at least one year.
• Minimum Subscription – 90% of the offer through the prospectus.
If not received issue to be cancelled and amounts to be refunded
within 70 days for an underwritten issue.
IPO Grading
• Initial Public Offering (IPO) Grading has been introduced (Mandatory
2007 onwards) by SEBI as an attempt to make additional information
available for investors to facilitate their assessment of equity issues
offered through an IPO.
• Investment decisions for IPOs presently require analyzing complex
disclosure documents, which is a challenge for investors, especially
retail investors.
• IPO Grading aims to provide an independent, unbiased view of the
company's fundamentals, enabling the investor to benchmark new
issuers with their peers in the equity universe.
Benefits of IPO Grading..
• IPO grading brings value to issuer and investors.
• It provides an independent evaluation of the fundamental strength of
an issuer.
• The evaluation/grade enables relative assessment between the
companies of different sizes operating in different industries.
• It helps in increasing both domestic and foreign investor participation.
IPO Grading Process
• The issuer has to submit the IPO grading along with a filled Draft Red Herring
Prospectus or a Red Herring Prospectus to SEBI. The typical IPO grading process
will take a time of four to six weeks. The process typically follows the following
steps:
• The issuer signs an agreement with IPO Rating Agency (IRA).
• Fees are decided according to relevant regulatory guidelines, or are negotiated
between the issuer and IRA if the guidelines are not available.
• Publicly available information, including the prospectus filed with SEBI, past
annual reports is reviewed.
• In-depth discussions with the promoters and management are conducted.
• The analysis is finalized.
• An IPO grading committee is held for assigning a grading and issuing a grading
rationale and grading letter.
Qualitative Quantitative & Analysis
• On the Qualitative aspect, IRA evaluates factors including, but not limited
to:
• Industry analysis and market position.
• Analysis of the operating environment.
• Management quality and parentage.
• Corporation governance, quality of disclosures in the prospectus,
accounting standards, and compliance.
• On the Quantitative side, IRA evaluates the financial strength and stability
of the issuer.
• This is customized, depending on the nature of the issuer i.e.
bank/institutions/non-banking finance company or corporates. An analysis
of a corporate issuer would include evaluating factors such as:
• Past financial performance including growth, earnings, profitability, cash
flow analysis, capital structure, liquidity, and working capital.
• Future financial prospects including investment, capital expansion,
acquisition plans and utilization of IPO proceeds, and projections.
Sample Grading

Grading Category Definitions

Ind-Ra IPO Grade 5 Strong fundamentals

Ind-Ra IPO Grade 4 Above average fundamentals

Ind-Ra IPO Grade 3 Average fundementals

Ind-Ra IPO Grade 2 Below average fundementals

Ind-Ra IPO Grade 1 Poor fundamentals

The Process of an IPO
PREPARING THE COMPANY FOR
IPO
• Deciding on the financial year, balance sheet, group structure.
• Formulating the scheme of the IPO – purpose, size, promoters’
stake post-issue, pre-issue capital structure arrangements, pre-
issue disclosure arrangements.
• Negotiations with potential lead managers and evaluating bids
• Deciding with the lead manager the main parameters of the
issue
• Pricing
• Issue Structure
• Pre-issue placements
• Marketing
• Issue Budget
• Offer document preparation, risk factors, disclosures relating to
promoters, group companies, litigations etc.
• Assisting in the due diligence process, paper-work
• Co-ordination with LM and other agencies during the entire
issue process.
IPO Process
• Pre-issue Activities
• Board and EGM / AGM resolutions.
• Decide on Fixed Price Offer or Book Built Offer
• Engage lead merchant banker and enter into agreement.
• Appoint other merchant banker and intermediaries such as
syndicate members, underwriters, brokers, bankers, registrar,
printers, PR agency.
• Due diligence by pre-issue merchant banker.
• Finalization of Issue Structure and issue budget.
• Preparation of DRHP including financial certification by
auditors.
• Filing DRHP with SEBI. Quiet Period for 30 days.
• Prepare and file listing application with stock exchange along
with DRHP for in-principle approval.
• A copy of DRHP is also filed with ROC for observations.
IPO Process
• Pre-issue Activities
• Road shows and talks with potential underwriters, anchor
investors, press, brokers and investor associations.
• IPO grading process from at least one rating agency.
• SEBI observations, stock exchange observations, changes to DRHP
and finalize RHP. File final RHP with ROC for registration.
• Receipt of in-principle listing approval from stock exchange. Under
ICDR it should be within 15 days of filing DRHP.
• Tripartite agreement with NSDL / CDSL and registrar for
dematerialisation of shares.
• Printing of application forms (with abridged prospectus as per
necessary disclosures provided in Schedule VIII of IDCR
Regulations) and RHP.
• Statutory and voluntary advertisements in print and media.
• Despatch of issue stationery to all mandatory collection centres of
syndicate members, brokers, investor associations etc.
IPO Process
• During Issue
• Issue should be closed after keeping it open for a minimum of 3
working days and maximum of ten days including 3 days for
price revision if any.
• Each bidder can furnish three options in his bid but the amount
to be paid along with the bid would be the one applicable to the
highest bid amount payable among the options.
• QIB investors can bid placing a margin amount in escrow while
the others have to bid paying the full amount with their bid
forms.
• Applicants can bid for three different prices and quantities at or
above the floor price or within the price band as may be
applicable. Retail investors are allowed to bid at cut-off price.
• The collection centres receive the payments and send them to the
escrow bank for collection.
IPO Process
• Post-issue Activities
• Issue process reduced to T+12 in 2010. In the past (2003) SEBI
attempted to introduce T+7 which was resisted by the
investment bankers. SEBI moved to a T+6 global standard model
in 2016.
• No allotments can be made until the minimum subscription is
received.
• No allotments can be made until the beginning of the fifth day of
the issue of the Prospectus .
• Receipt of confirmations from bankers and determination of
valid subscription lists by registrar.
• Determination of Cut-off Price based on bidding schedules.
IPO Process
• Post-issue Activities
• Finalizing the basis of allotment –
• Use of the over-subscription ratio
• Applicable issue allocation norms should be followed
• Allotment subject to Minimum lot
• Over-subscription leads to draw of lots
• Board resolution to be passed confirming basis of allotment.
• Intimation to successful and unsuccessful allottees. Transfer of
refund amounts to refund account to be refunded (in case of non-
ASBA applications). Credit of shares to demat accounts of
successful allottees.
• Completion of final listing approval formalities with stock
exchange.
• Transfer of funds from escrow account to company’s account after
filings with SEBI and Stock Exchange.
• Trading begins on listing day.
• Filing of allotment details with ROC in prescribed form.
Process Overview and Time Frame
Illustrative Book Built Public Issue Process in weeks

Determination of Floor
Price/ Price Band,
Filing of Final
Formation of Prospectus with ROC,
underwriting syndicate, underwriting
road shows and agreements, issue opens
amendments to DRHP and closes, allotments,
and finalizing of RHP. trading.

Issue presentations
(Pitching), MOU
by lead managers,
Due Diligence,
Filing of DHRP
with SEBI.

6-8 w 12 w 16-18 w
ISSUE MANAGEMENT
Issue Management
Team
• Lead Manager(s) / BRLMs
• Underwriting Syndicate
• Brokers
• Other Service Providers – Registrar, Bankers,
Printers, Courier, PR Agency
• Auditors
• Legal Advisers
• Issuer’s team –
• CFO
• Company Secretary / Compliance Officer
• Financial Adviser
Issue Management
• Main aspects -
• Issue Structuring
• Due Diligence
• Preparation of Offer Document
• Ensure necessary statutory compliance
• Tying up appropriate underwriting arrangements
• Preparing, controlling and monitoring issue budget.
• Marketing of Issue, proper positioning and branding.
• Interactions with various agencies involved with the
issue – SEBI, underwriters, bankers, auditors, experts,
law firm, registrar, printer, PR agency, press and media,
brokers, courier agency and investor associations.
• Post Issue allotment, compliance matters and listing
formalities.
 Important Aspects

• Issue Pricing – unlike valuation, issue pricing is based on relative

valuation and market variables
• Capital Structure – total expansion to existing capital, post-issue
number of shares and shareholding pattern, compliance to guidelines,
marketability.
• Issue Structure – Face value of share and issue price, minimum
subscription amount, terms of payment, allocation of issue, NPO,
underwriting, costing.
 Important aspects of Issues

• Offer Document – One of the most important components of making a

public offer.
• It represents the quality of disclosures made by a prospective issuer
and sets a benchmark for future disclosures.
• It shows the way the company’s management was conducted in the
past and throws light on financial practices.
• It provides the basis for the issue price based on which investors can
take a call on the investment prospects of the issue.
Important aspects of Issues
• Determination of Cut-off Price
• Finalizing the basis of allotment –
• Use of the over-subscription ratio
• Applicable issue allocation norms should be followed
• Allotment subject to Minimum lot
• Over-subscription leads to draw of lots
SELECT PUBLIC OFFERS PRIOR TO 2008 MELTDOWN

Name of the Issuer Issue Price IPO No. of times Listing Price /
Rs per Grading subscribed Price Trend Rs.
share per share

Jet Airways 1100 NA 16 (80% top 685

end 1125)

GMR Infra 310 NA 8.6 315 - 152

Tech Mahindra 365 NA 75 (QIB 104, 550

HNI 140)
Punjab National Bank 390 NA NA 500-300

Reliance Petroleum 60 NA 50 102 (since

merged)
Reliance Power (Bonus issue 450 4 by ICRA 73 Listing day 530-
3:5 in June 2008) Post Bonus 386
cost 280
IPO Success – Expert
speak
• ‘Positioning’ and marketing are crucial.
• IPO marketing is parallel to a movie /pizza/cola/FMCG.
• “A company making IPO should stimulate you to ‘consume’ the IPO. If
branding, timing, pricing and communication are not correct, the IPO
will be lost.” – Jagdeep Kapoor, Marketing Consultant
• “Pricing is the key. The IPO pricing exercise needs to strike a fine
balance between optimally monetizing the issuer’s holdings and
achieving high valuations for the stock on one hand, and making it
attractive from the investor’s standpoint and after-market performance
on the other. It is back to the good old days, where investors are
extremely value sensitive and display low appetite for high risk, high
growth stories with low near-term visibility of revenues / earnings” –
Kotak I-banking
• The PR firm managing the issue campaign and the broking community
also have a huge role to play. Numerous broking houses become
opinion makers. “Third party testimonials play a major role as analysts
with sectoral knowledge step in.” – Head of a large brokerage house.
IPO MARKET TRENDS
AND CASE STUDIES
Public offers – 2008 and later
• Towards the close of the bull markets in early 2008, two
public offers, namely EMAAR Developers and Wockhardt
Hospitals were withdrawn for lack of investor support
inspite of scaling down their price. While the former was
withdrawn after the issue opened, the latter was
withdrawn prior to its opening.
• In 2009 (post rebounding of markets), the IPO market saw
some action with the huge success of Adani Power IPO,
which was the first major issue. The Rs. 3000 crore issue at
offer price of Rs. 90-100 per share was graded 3 by ICRA
was oversubscribed 21 times overall with QIB going at 410
times. It traded above offer price until mid 2011.
Public offers – 2008 and later
• But listing gains were not seen in NHPC public offer, a
disinvestment offer by the Government. The issue, priced
at Rs.36 opened at Rs. 39 and closed at Rs. 36 on the
opening day, going down below the offer price in the next
week.
• In order to provide better investor response, several I-
banks and finance companies re-initiated IPO financing
products in the market. HNI investors could not recover
financing costs even in the NHPC offer.
• Another disinvestment issue of OIL also opened in the first
week of September at a price band of Rs. 950-1050. Both
NHPC and OIL were branded as over-priced by analysts.
NHPC had an offer P/E of 38 (the highest among all
disinvestment IPOs) while OIL was at 10.
Public offers – 2008 and later
• Another interesting development has been the return of corporate
bond offerings in the public market after a span of a more than a
decade.
• The successful issues have been that of Tata Capital, L&T Finance
SBI, Shriram Transport Finance Corporation. All of them were
offers of NCDs except SBI (as opposed to bonds) with different
structures.
• L&T’s Rs. 1 billion issue (with a green shoe of 100%) was
oversubscribed 4 times overall and in all categories as well. HNI
was the best category registering 6 times. favoured more by
institutional investors than retail investors, through about 70% was
reserved for them.
• Coal India Ltd’s IPO in 2010 at cut-off price of Rs. 245 per share was
graded 5 by CRISIL was well received by QIBs and saw fair returns
in the past two years. Listed at Rs.290. Only major success in 2010.
Public offers – 2011
• The year 2011 was disastrous for IPOs with about 30 IPOs
that traded below offer price. Investors lost about 80% of their
initial investment in about 12 issues. While 11 issues were
between Rs 100 crore and Rs 1,000 crore, 25 offers were small
ticket ones with a size of less than Rs 100 crore. This forced
even the government to abandon its FPO plans for ONGC
and instead go for an institutional placement in March 2012
which was eventually bailed out by LIC.
• There were only three public offers with sizes of above Rs
1,000 crore in 2011 (Tata Steel and PFC FPOs and L&T
Finance Holdings IPO). In 2010 there were 14 public offers
with issue size of above Rs 1,000 crore.
• In 2011, 29 IPOs were called off due to poor market
conditions.
Public offers – 2012
• The year 2012 saw the successful IPO of Multi Commodity
Exchange (MCX) . Among the several banks that held stake in MCX
prior to the IPO, only SBI, Bank of Baroda and Corporation Bank
offloaded bulk of their stakes in the IPO through an offer for sale.
The issue raised Rs. 660 crore at a cut-off price of Rs.1032 per share
and was oversubscribed 54 times with huge over-subscriptions
across all categories. The MCX scrip was also one of the first to be
listed on the new norms introduced by SEBI to curb listing day
volatility in stock price. The scrip started to trade at a discovered
price of Rs 1387 and reached an intra-day high of Rs. 1416 before
closing the first day at Rs.1297. Traded above offer price until May
2012. Currently at Rs. 1100.
• Speciality Restaurants’s IPO was offered at Rs. 150 opened at Rs.
153 and presently quotes above Rs. 200. (IPO Grading 4 indicating
above average fundamentals). There was good response from
Anchor Investors.
Public offers – 2012
• Tribhovandas Bhimji Zaveri IPO quoted below offer price of Rs. 120 since
listing at Rs. 115. (IPO Grading 3 indicating average fundamentals)
• The first SME IPO (BCB Finance) was offered at Rs. 25 and presently also
quotes at Rs. 25 due to the presence of market making.
• The Rs 1665 crore IPO of Samvardhana Motherson Finance Ltd (SMFL)
was withdrawn due to poor response from investors across the board.
SMFL’s offer was subscribed 0.23 times on its final day of subscription. QIB
quota was the most subscribed with bids for 57% shares. The response in
HNI, retail and employee quota was the worst in recent years. All of these
categories received bids only for 1% of the quota allocated. As per experts,
wrong timing of the IPO and stiff pricing of the shares were the major
reasons for the failure of the IPO. J.P. Morgan and Standard Chartered
Securities were the BRLMs.
• The company had a profit of Rs. 13 crore on gross income of Rs. 40 crore for
the FY 2011. The IPO was graded 4 (above average fundamentals) by ICRA
and the pricing was Rs. 113-118 per share.
• In 20102, 17 IPOs were called off till June due to poor market conditions
including Goodwill Hospitals, Galaxy Surfactants, Plastene etc.
Public offers – 2013 – JUST DIAL
• Just dial is a 24/7 Free Search service on a single national number
08888888888 that receives over 130 Million Calls every year. It
provides reliable information about local businesses, products and
services to the users in over 2000 cities in India having more than
300 million users.
• Selling advertisement and qualified leads is the main source of
earning for Justdial. They have more than 145,000 paid advertisers.
Companies promote their brand across the Just Dial network and
reach millions people who are actively looking for information
about the products and services. There are 4 ways available to
promote brand or advertise on JustDial including Listing on Web,
Listing on Phone Search, Listing on Mobile Search and Placing
Video Ads.
• The company did not require any funds through IPO. The main
purpose of listing was the offer for sale by selling shareholders. The
entire offer was an offer for sale.
Public offers – 2013 – JUST DIAL
• The public issue of Just Dial services was the most successful
in 2013.
• Issue was opened around end of May 2013.
• It listed on June 5th and closed the first day with a handsome
gain of 15% on the offer price. The price band was Rs. 470-543.
Cut-off Price was Rs. 530. IPO grading by CRISIL 5/5.
• The issue offered a 10% discount and a safety net to retail
investors upto Rs. 50,000. The net was to be triggered for a
20% fall in market price below the offer price.
• The Offer price of Rs. 530 was at a P/E of 90 without any peer
comparison. The offer price was close to 10 times the BV of
share.
• The total issue budget amounted to 4.55% of the Issue Size and
was borne entirely by the selling shareholders.
Public offers – 2014
• Incorporated in 1993, Snowman Logistics Limited is an integrated
temperature controlled logistics service provider with 23
temperature controlled warehouses across 14 locations in India.
Its IPO in Aug 2014 with a price band of Rs.44-47 per share was
well received getting oversubscribed 60 times. It listed at Rs. 75
and traded well thereafter. It was a public issue of shares.
• Wonderla Holidays Ltd is one of the largest operators of
amusement parks in India. Its IPO in April 2014 with a price band
of Rs.115-125 was subscribed 38 times overall but the issue size
was small at Rs. 181 crore. It opened at Rs. 165 and was trading
around Rs. 275 after an year of listing. The IPO had good anchor
support from domestic institutional investors.
Public offers – 2015
• The IPO of UFO Moviez in April 2015 drew good response of 2.04
times with the retail quota being oversubscribed by 1.02 times.
UFO Moviez Ltd is India's largest digital cinema distribution
network and in-cinema advertising platform. The company being
profit making, went for a 100% book built offer with 50% quota
to retail, 28.5% to QIBs and 21.5% to HNIs. With a price band of
Rs. 615-625 per share, the QIB quota was subscribed more than 5
times. It was a 100% offer for sale. Issue size Rs. 600 crore.
• VRL Logistics Ltd (VRL) is one of the leading pan-India surface
logistics and parcel delivery service provider. It owns and
operates the largest fleet of commercial vehicles in the private
sector in India. Its IPO in April 2015 with a price band of Rs. 195-
205 per share was cut-off at Rs. 205 due to heavy
oversubscription of 74 times overall. It listed at Rs. 288 and has
successfully traded above offer price in aftermarket trading. Issue
size was about Rs. 473 crore.
Public offers – 2015
• Teamlease Services Ltd is a HR and people supply-chain company.
The IPO was for Rs. 424 Cr comprising of new issue of Rs. 150 Cr and
secondary issue of Rs.273 Cr. The issue was made finally at the upper
band of Rs.850 per share with an offer P/E of 45. The offer was well
received with overall 66 times subscription (NII 185 times). It listed at
Rs. 860 and gave listing returns though there was selling pressure.
Traded at Rs. 920 after 4 months.
• Interglobe Aviation runs Indigo Airlines with the largest market share in
India currently. The company also runs Ibis Hotels in association with
Accor Hotels. The IPO has primary and secondary components. Offer
price Rs. 750, Issue size Rs. 1272 Cr, good QIB support (18 times), retail
undersubscribed but overall subscription was 6 times. Profit making at
the time of IPO. Listed comfortably at Rs. 855 and traded at over Rs.
1000 after about 9 months.
Public offers – 2015
• Coffee Day Enterprises Ltd, a loss-making company, made a new
issue of shares for Rs.1150 Cr at an offer price of Rs. 328. Company had
very well known anchor investors such as Blackrock, Merrill Lynch and
Swiss Finance Corp. QIB response was good but other categories were
undersubscribed. Overall it received 1.82 times. Listed below offer price
at Rs. 317 and went down to Rs. 217 on first day close. Was trading
below offer price even after 9 months.
• Syngene International Ltd a profit making company and subsidiary of
Biocon went public with a secondary offer of shares at Rs. 250 for a
small issue of Rs. 550 Cr. It received very good response from all
categories with overall 32 times (QIB 51 times). It listed high at Rs. 295
and traded at Rs. 400 after one year. Syngene International is an India-
based contract research organisation (CRO), offering a suite of
integrated, end-to-end discovery and development services for novel
molecular entities.
Public offers – 2016
• Equitas Holdings Ltd is Chennai based financial services provider
focused on individuals and micro and small enterprises (MSEs) in
microfinance, business and vehicle finance and housing finance. .
The IPO had an OFS and a Public Issue component. Equitas holds a
RBI licence to start a small bank. The issue size was Rs. 2175 cr
made at an offer price of Rs. 110 per share. The offer was highly
successful with total bidding of 17 times overall with aggressive
response from QIBs and NIIs. Issue listed at Rs. 144 and was trading
at Rs. 175 after 2 months.
• Ujjivan Financial Services Ltd made an IPO with OFS and Issue
component aggregating to Rs. 888 cr. The offer was
oversubscribedin all segments by 40 times overall but QIB (34) and
NII (135) were very high. Offered at Rs. 210 per share, it listed at
Rs.231 and was trading at Rs. 375 two months later. Ujjivan is a
microfinance company.
Public offers – 2016
• Thyrocare Technologies Ltd is one of the leading pan-India diagnostic
chains. It made an IPO consisting entirely of secondary stock (OFS) of
Rs. 479 cr. Offer had a high pricing of Rs. 446 per share but listed with a
substantial listing premium at Rs. 662 with good anchor investors.
Traded at Rs. 570 two months later. Offer was heavily over-subscribed
overall by 73 times (NII 225 times).
• Another successful IPO in this space was Dr Lal PathLabs which was
heavily fancied by QIBs (64 times). Offered at Rs. 550 per share, listed
at more than 30% premium. It was an entirely OFS issue.
• Other notable offers were Infibeam (India’s first e-com listing) and
Narayana Hrudayalaya. Infibeam, a cash positive company but loss
making company did not raise any PE capital prior to IPO. It was a fund
raising offer for Rs.450 cr at Rs. 432 per share, valuing it at Rs. 2300 Cr
(post-IPO), listed at Rs. 453 and quoted at 691 after 2 months. It was
just about subscribed at 1.11 times (QIB under-subscribed). NHL was
predominantly a OFS with a small component of new issue. Total size
Rs. 613 cr, Offer Price – Rs. 250, listed at Rs.291, quoted at Rs. 320 after
6 months. Good response in all categories.
OTHER PROMINENT offers –
2015/16
• Alkem Laboratories - saw its shares fully subscribed on the
second day of the offering. The company raised almost Rs 1,350
crore ($203.7 million), one of the highest IPO capital raising in
2015.
• Inox Wind Ltd – A wind energy solutions provider, it was one of
the early firms of 2015 for IPO. It raised little over $166 million
being oversubscribed 17.5 times.
• Navkar Corporation Ltd– This logistics company made its debut
in 2015. The issue of the company got oversubscribed 1.8 times
even after a slow start on day first. The company raised $95.7
million.
• Parag Milkfood – Profit-making company, Issue cum OFS, offered
at Rs. 215, listed at same price, traded over Rs. 250 after a
month. Received overall 1.83 times (QIB 1 time) subscription.
• All the above are cases of successful PE backed IPOs. 2015/15 and
15 saw successful PE backed IPO exit transactions in India.
Underwriting
Underwriting Definition..
• SEBI Regulations 1993 defines Underwriting as an agreement with or
without conditions to subscribe to the securities of a body corporate
when exiting shareholders of such corporates or public do not
subscribe to the securities offered to them.
• An underwriter according to the same regulations means a person
who engages in the business of underwriting of an issue of securities
of a body corporate.
Underwriting Definition
• Underwriting is always in connection with a proposed issue of
securities by a body corporate. It is not a general understanding
between a company and a underwriter. The specific underwriting
commitment has to be documented through an underwriting
agreement.
• Underwriting is an agreement by the underwriter to subscribe to the
securities being issued in case the person to whom they are offered
do not subscribe to them.
• The underwriter’s job is to market the underwritten securities to
investors and procure subscriptions for such securities.
Sub-Underwriting
• Sub-underwriting is used by an underwriter to spread the risk assumed in
underwriting an issue of shares.
• Sub-underwriting is a process under which the underwriter appoints other
people to underwrite his/her own underwriting obligations.
• A has an underwriting agreement with company XYZ for 10,000 shares  A
may choose to appoint B and C to underwrite 5000 shares each out of A’s
total obligation  B and C then would be called sub-underwriters to A, and
 A would be underwriter to XYZ.
• A sub-underwriter has the same obligation to the underwriter as
underwriter has to the issuer company.
• The underwriter shares the underwriting fee with the sub underwriters for
their efforts.
Underwriting Commission
• The underwriter’s compensation for the services rendered is the fee
that is paid by the issuer company.
• This fee which is known as underwriting commission, is paid as
percentage of the value of underwriting (No. of Securities
Underwritten x Offer Price).
• Underwriting commission is payable irrespective of whether the
underwriter ultimately has any requirement to purchase the
underwritten securities or not.
• Underwriting commission is different from brokerage which is paid to
the stock broker to market securities. It is for assuming underwriting
risk.
Underwriting Agreement
• The underwriting agreement should contain the following main
provisions –
1. Amount being underwritten
2. Provision for sub-underwriting
3. Computation of devolvement
4. Procedure for effecting or discharge of underwriting obligations.
5. Right to receive commission as per agreed terms.
6. Statutory declarations.
Devolvement
• Devolvement is the amount of financial support to be provided by an
underwriter in an under-subscribed issue of securities.
• Method of Computation recommended by SEBI for the purpose of
arriving at devolvement of underwriters is as follows-
1. All eligible applications received from investors towards
subscriptions for the securities in the issue shall go to reduce
underwriter’s obligations to that extent. However, to ascertain each
underwriter devolvement, if any, following steps should be followed
in a sequence.
2. All procurements made by a particular underwriter or his sub-
underwriters out of (1), shall be allocated to that underwriter.
Devolvement
3. All applications forming part (1) but invested directly by investors
without being rooted through underwriters/shall be allocated pro-rata
to all underwriters in the ratio of their underwriting obligations.
4. After following steps (2 &3), if any underwriter has been allocated
more than his underwriting obligation, such access should be allocated
pro-rata to other underwriters who still have a deficiency.
5. Devolvement is the positive balance that remains in the account of a
particular underwriter after the above steps are completed.
Illustration of Devolvement
• ABC Ltd. makes an issue of 10,000 shares of Rs. 10 each at par
aggregating to Rs. 1,00,000. the issue has been underwritten fully by
two underwriters X and Y to the extent of Rs.50,000 each. The issue
has been closed and the following information available on the
subscriptions.
• Valid Subscriptions Received – Rs.76,000
• Received through underwriter X – Rs.27,500
• Received through underwriter Y – Rs.34,800
• Direct subscription received – Rs. 14,200
• Examine the underwriters’ devolvement.
Solution..

Total Shares on Offer 100000

Valid Subsription Received 76500
Under Subscription (Total Devolvement) 23500
Computation of Individual Devolvement X Y
Total Underwriting Obligations 50000 50000
Less. Valid Subscriptions Procured 27500 34800
Less. Direct Subscriptions Allocated 7100 7100 Total Undersubscription
Devolvement 15400 8100 23500
Illustration 2
• ABC Ltd. Makes an issue of 10,000 shares of Rs. 10 each at par aggregating to
Rs.1,00,000. the issue has been underwritten fully by four underwriters P, Q,R
and S extent of Rs.20,000, Rs.30,000, Rs. 35,000 and Rs. 15,000 respectively. The
issue has been closed and the following is the information available on the
subscriptions.
• Valid Subscription Received = Rs.76,500
• Received through underwriter P = Rs.11,700
• Received through underwriter Q = Rs.22,400
• Received through underwriter R= Rs.8,300
• Received through underwriter S= Rs.22,600
• Direct subscription received = Rs.11,500.
• Underwriters are paid a commission of 2.5% on subscriptions received and 2% on
devolvement. Compute the underwriters’ devolvement and the commission
recievable by each of them.
Illustration 2 - Devolvement and Commission
Total Shares on offer 100000
P 20000
Q 30000
R 35000 P+Q+R 85000
S 15000
•Valid Subscription Received 76500
•Received through underwriter P 11,700
•Received through underwriter Q 22400
•Received through underwriter 8300
•Received through underwriter S 22600
•Direct subscription received 11500

Total Shares on offer 100000

(-)Valid subscriptions received 76500
Under subscription (Total Devolvement) 23500
Computation of Individual Devolvement P Q R S
Total Underwriting Obligations 20000 30000 35000 15000
(-) Valid Subsciptions Received 11,700 22400 8300 22600
(-) Direct Subscriptions Allocated 2300 3450 4025 1725
Gross Develovement 6,000 4,150 22,675 -9,325
(-) Negative balance of S allocated -2194 -3291 -3840 9,325
Net Devolvement 3,806 859 18,835 0

Computation of Underwriters Commission P Q R S

Valid Subscriptions Received 11700 22400 8300 22600
Commission @ 2.5% 292.5 560 207.5 565
Net Devolvement 3,806 859 18,835 0
Commision @2.0% 76.11765 17.17647 376.7059 0
Total Commission Recievable 368.6176 577.1765 584.2059 565
Overall Underwriting Commission 1.84% 1.92% 1.67% 3.77%
Underwriter’s Business Model
• Underwriting is a fee-based business though many a times, if
underwritten issues are not successful, the underwriter ends up with
a significant exposure to issuer companies and consequently to
market risks.
• SEBI has prescribed the requirements of minimum capital adequacy
and a cap on the underwriting obligations that can subsist at any
given time.
• Regulation 7 prescribes the minimum capital adequacy is Rs. 20 Lakh
and Regulation 15 prescribes that the maximum underwriting
obligations cannot be more than 20 times the net worth of the
underwriter.
Underwriter’s Business Model
• There are several investment bankers that specialize in underwriting
and do not get into issue management per se. These firms depend
upon underwriting commission as the principal source of income.
• However, since their business model is fraught with the risk, they
develop an extensive network of sub-underwriters, brokers and
distribution agents to market the securities underwritten by them.
• The main drivers to a viable underwriting business model are:
1. The net worth of the underwriter
2. Amount of devolvement
3. Capital losses arising therefrom.
Illustration 3_ Business Model of Underwriters
• Assumptions
1.Present Net Worth – Rs. 25 Lakh
Devolvement Probability – 0.25
Devolvement Quantum – 50%
Cost of Debt -12%
Average Cycle Time – 3 moths
Underwriting commission – 2.5% on procurement and devolvement
Tax Rate – 30%
Capital Loss on Devolved Securities (Difference between offer price and
market price) – 15%
Underwriter’s Business Model
Illustration 3 Business Model of an Underwriter
Business Cycle Q1 Q2 Q3 Q4
Present Net Worth 25.00 26.40 27.88 29.44
Maximum Underwriting 20 500.00 528.00 557.57 588.79
Devolvement Probability 25% 125.00 132.00 139.39 147.20
Devolvement Quantum 50% 62.50 66.00 69.70 73.60
Loan Funding Required 37.50 39.60 41.82 44.16
Cost of Debt 3.00% 1.13 1.19 1.25 1.32
Underwriting Commission 2.50% 12.50 13.20 13.94 14.72
Capital Loss on Devolved Securities 15% 9.38 9.90 10.45 11.04
Profit Before Tax 2.00 2.11 2.23 2.36
Tax 30% 0.60 0.63 0.67 0.71
PAT 1.40 1.48 1.56 1.65